In the land of investing, the only free lunch is diversification. Yes, this blog is also free 🙂 Perhaps that is dessert on top of that diversification free lunch message that I also offer up with regularity. Today’s environment carries more swirling risks and challenges than I have seen in my 30+ year investment ‘career’. That said, thanks to portfolio diversification, our portfolios are at all-time highs and the considerable and mounting risks do not translate to stress. The portfolios hold assets that will respond to ‘most anything’. A key will be to trim assets that are working very well, and move the proceeds to underperforming sectors or assets. It’s time to rebalance the portfolio on the Sunday Reads.
Here is a very solid post on that free lunch, thanks to Morningstar. And from that post, a chart that shows the diversification effect on display during the COVID correction during the first quarter of 2020.
And looking at other recent stock market corrections.
Yes, bonds are usually there to provide support during stock market corrections.
Greater diversification
While bonds can do a wonderful job of keeping an eye on the stock markets, we can add to the free lunch of diversification with servings of gold, commodities, real estate, greater international diversification and more. Before the pandemic became the pandemic, I suggested how investors might prepare. The free lunch of greater diversification did pay off beyond the traditional use of bonds in a balanced portfolio.
Here’s – how did the pandemic portfolio perform?
And from 2021 the free lunch of greater diversification continues to deliver. In The Russcession is Coming! you’ll see a portfolio example where I bolt-on inflation protection to a traditional balanced portfolio.
And the key will be to rebalance. We are in periods of wild volatility as assets can quickly move in opposite directions, and they can move in a hurry. Gold and commodities are known to do nothing for long periods (and can even be a major portfolio drag) and then they do everything when inflation hits, and spikes.
The Permanent Portfolio
A wonderful example of diversification is offered by the Permanent Portfolio. I had a quick look at Permanent Portfolio performance, as I am currently writing a post on Seeking Alpha, creating the all-weather portfolio for U.S. investors.
The all-weather portfolio is an extension of the Permanent Portfolio.
From 1972, here is the performance of the Permanent Portfolio – Gold, stocks, bonds, cash.
That is an incredibly straight line (lower volatility) for an investment portfolio. The approach involves (requires) rebalancing between those 4 largely uncorrelated assets.
The traditional balanced portfolio can struggle
My latest for MoneySense looks into the recent struggles of the traditional balanced portfolio that consists of stocks and bonds. A rising rate environment can certainly put downward pressure on stocks and bonds. They can fall together.
Must read: The New Balanced Portfolio.
And who knows what ‘type’ of rising rate environment we might see. Today’s investor is only familiar with the bond bull run from 1981. Will there be a lost decade for the traditional balanced portfolio?
My MoneySense column also looks at the very meaty topic of the redrawing of the global trade maps. We might have a new economic cold war. There will be costs as we bring production and materials acquisition closer to home. Will the world divide into good vs evil trading blocs? Of course, like everything that happens these days, the event is inflationary. 🙁
More Sunday Reads
Also on MoneySense, Larry Bates of Beat The Bank fame, looks at switching to lower cost investing.
Assume a $100,000 investment generates an average annual compound return of 7% before total annual advisor and fund management charges of 2%. After 30 years, the investment would be worth $432,194. A 30-year investment that produces the same 7% pre-fee return with total charges of 0.65% would be worth $634,052. A 1.35% cost reduction produces more than $200,000 in additional net return for the investor. Fees matter! You can try out your own scenarios here.
Lower your fees even more (self direct) and the advantage is exaggerated beyond the 0.65% used in that post. Yes, you certainly can retire with twice as much. And that low-fee benefit in retirement when fees don’t eat away at your portfolio, is a greater plus, even compared to the accumulation stage.
On My Own Advisor, we have the debt clock, tax tips and more in the Weekend Reads.
You’ll find a great list of Canadian, U.S. and international reads on the week in review on Dividend Hawk. Hawk also offers the headlines of the week for stocks.
There’s a new post every day, from Monday to Friday, on The Hub. In this post Jonathan Chevreau looks at the CDRs offered by the Neo Exchange. Canadian investors can reduce currency risk and buy U.S. stocks in Canadian dollars. You can buy those U.S. stocks with smaller sums, as well.
Survey says!
Bob at Tawcan created a reader poll and was offered some very interesting results. That includes the investment approach of readers.
On Banker on Wheels, a personal journey to FIRE – financial independence retire early.
On Stocktrades.ca Mat offers the top 6 REITs to consider in 2022.
Thanks for reading. It is time to rebalance the portfolio? We’ll see you in the comment section. You can follow this blog by way of the subscribe button, it’s free!
Cut The Crap Investing Partners
You will earn a break on fees by way of many of these partnership links.
CANADA’S TOP-RANKED DISCOUNT BROKERAGE
Cut the Crap Investing readers can earn a break on fees at Questrade by way of that partnership link. At Questrade, you can buy ETFs for free.
I have partnerships with several of the leading Canadian Robo Advisors such as Justwealth, BMO Smartfolio ,Wealthsimple, Nest Wealth and Questwealth from Questrade.
Here’s Canada’s top-performing Robo Advisor.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
RETIREMENT FUNDING PLANNING
The self-directed investor might consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios where they will provide options for that optimal retirement funding strategy. That service is provided for a very reasonable fee.
If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya 🙂
OUR SAVINGS ACCOUNTS
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 1.25%. You’ll find some higher rates on GICs, recently updated and increased t0 2.05% for short term offerings. They also offer U.S. dollar accounts. We use them, they have been awesome.
OUR CASHBACK CREDIT CARD
We make between $60 to $70 every month! And that’s on everyday spending. There are no fees with …
The Tangerine Cash Back Credit Card
While I do not accept monies for feature blog posts please click here on the mission and ‘how I might get paid’ disclosures. Affiliate partnerships help me pay the bills for this site. That will allow me to keep this site free of ads and easy to read.
Kindly use the buttons below to share this post. Don’t forget to follow this blog, use that subscribe button.
Helping Ukraine
More than two million people have been displaced from Ukraine since February 24, 2022, and aid is urgently needed. Consider making a contribution to the Canadian Red Cross, Canada-Ukraine Foundation, Help Us Help, Save the Children Canada, Global Medic or another charitable organization of your choice. Be sure to donate to reputable charities actually making an impact, and beware of fundraising scams.
Portfolio rebalancing should be organic, as opposed to active.
If one sector is getting too big as opposed to the other ones, when you have new money to invest, invest it in the lagging sectors. If need to withdraw money, withdraw it from the leading sector.
The yearly buying as selling to have a precise percentage is unnecessary. And if gets too far away from your original plan, remember that 1. the original plan was random. And 2. One of the laws of successful investing is to let the winners ride.
Whoever sold stocks to buy more bonds, has drastically underperformed the market.
Hi Alain, I think you might have a couple of opposing thoughts in there. Do you like rebalancing or letting the winners run?
Dale
No re-balancing ever needed here. My wife & I are 100% TSX listed dividend income/growth stocks in 5 sectors only – banks, utilities, midstream, telco, and REITs.. We have absolutely no bonds or GICs but do have a cash wedge. We get our foreign exposure indirectly with companies that have US exposure and a bit of Europe. Our portfolio generates almost 3x as much income as we need for all our expenses.
I’ve been retired for 9 years without any pension and have seen our portfolio consistently grow even with our withdrawals of some of our dividend income for our expenses. We also have hit a number of new highs for total portfolio value throughout the last year , the most recent being Mar 22. (not that total returns matter to us at all as it’s all about the income).
Anyway, we don’t believe at all in diversification and a balanced portfolio. 🙂
Ciao
Don
Hi Don, it’s wonderful that you have a very large cushion. You might need that, or not. The market conditions will decide. We’ve mostly been in a disinflationary environment as you know. If that changes, what works changes. That said, you do have much more that you need.
For most every investor’s sake, let’s hope real inflation goes away, we don’t get stagflation, and we return to disinflationary when stocks and bonds can do well enough 🙂
Dale
Re: Larry Bate’s assumption above
There is no doubt, fees can be a major factor in long term performances but so can active management. To be fair Mr Bates should have noted his example also assumes the mutual fund and ETF being compared had the same, or very similar, holdings.
I suppose its fairly east to calculate the before total annual advisor and fund management charges but to my knowledge performance numbers are always post fees and expenses.
Remember that most active managers under perform, and mostly due to fees, but it also goes to poor fund management.
Dale
No re-balancing ever needed here. My wife & I are 100% TSX listed dividend income/growth stocks in 5 sectors only – banks, utilities, midstream, telco, and REITs. We have absolutely no bonds or GICs but do have a cash wedge. We get our foreign exposure indirectly with companies that have US exposure and a bit of Europe. Our portfolio generates almost 3x as much income as we need for all our expenses.
I’ve been retired for 9 years without any pension and have seen our portfolio consistently grow even with our withdrawals of some of our dividend income for our expenses. We also have hit a number of new highs for total portfolio value throughout the last year, the most recent being Mar 22. (not that total returns matter to us at all as it’s all about the income).
Anyway, we don’t believe at all in diversification and a balanced portfolio. 🙂
Ciao
Don